Hello Fung,

Thank you, as always, for your comment, and in this case for an extended comment.

Regarding your point about the timing of investors into a fund...I have answered this question before in other venues. To me, as a former portfolio manager, the timing of my shareholders in and out of my fund was not my concern. My job was to manage money in accordance with my strategy. My contract with my investors was put forward in two venues: my prospectus and via my marketing team. As I have written about before, it is extremely important for investment managers to have firms that are structured in accord with the investment philosophy of the managers to avoid the problems to which you are alluding. Likewise a board of directors, and the other staff at a fund need to do the same: understand the philosophy and make decisions in service to that philosophy. This is not an argument that the board give management a free pass, but that they serve shareholders' interests relative to the investment philosophy outline in the contract. If advisers and investment consultants feel otherwise they are free to direct funds to shops that are committed to outperforming on a quarterly basis.

Separately, if you do believe managers are beholden to such concerns let's extend your argument a bit. Why not demand of them that every minute of every day they be outperforming "just in case" the index is a basis point ahead of the manager at that very moment? There really isn't a logical end to your argument.

Regarding your statistics about correlation...frankly, correlation and causality are not the same thing. Also, most funds that are long-only are going to show correlation with an index that has gone up and up and up and up. To me this is a meaningless criticism. It is the sort of argument - i.e. that managers should care about this sort of thing - that ends up hurting performance. These were some of the very points made in the other articles in the Active Equity Renaissance series, as well as in my Alpha Wounds series. I am going to put you on the defensive, in what way does it help end clients to track correlations in that way that you are? In what way does it enable investment managers to possibly outperform an index?

Also, and I am not an ACR apologist, there are SEC mandated rules in the Investment Company Act of 1940 that enforce diversification on portfolios. For example, if memory serves, your top five largest holdings cannot constitute more than 25% of your portfolio. Your top 20 cannot constitute more than 40% of the portfolio. So your complaint should be direct at the authors of that legislation in 1940.

Yours, in service,

Jason